Memphis Firm Out Thinks Wall Street and Today’s Other Top Stories

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Many bond market analysts have been left “all shook up” by the bond market this year, as yields fell when many thought they would rise, as the Fed pulls back on its bond purchases. But there is one firm in Memphis who did call it correctly.

Jim Vogel and Chris Low of FTN Financial, based just 11 miles from the gates of Elvis’s Home Graceland, were among a select few who correctly called the market, urging investors to ignore the general consensus for an inevitable selloff in bonds this year. Since at least 2011, FTN’s head of interest-rate strategies and chief economist have rightly gone against the pack by calling for low yields.

FTN says Treasuries are years away from reverting to pre-financial crisis levels as the labor market struggles. Getting it right has never been more important after a borrowing binge helped push the amount of debt globally to $100 trillion from $70 trillion in 2007.

“If you don’t expect interest rates to go back to where they were in the last cycle, you’re essentially asserting that something is very different in this cycle,” Low, told Bloomberg in an interview. “You can make that case more easily with every year that goes by when growth remains weak and several hundred thousand people fall out of the labor force.”

It might be a bit late, but the bond market consensus is coming around to the view of Vogel and Low. The year-end 10-year yield consensus has declined to 3.05 percent from 3.44 percent in January. Citigroup Inc. lowered its projection on June 27 to 2.95 percent from 3.35 percent, citing the Fed’s reduced estimate for the ultimate level of its federal funds rate target.

Todays Other Top Stories

LearnBonds

LearnBonds: – Dividend cuts – when “bond equivalents” default.– As the ultra-low interest-rate environment of recent years became too much for some bond-focused investors to handle, the search for greener pastures shifted to the equity markets—specifically to dividend-paying bond equivalent stocks. The allure of blue-chip stocks paying respectable dividends and increasing those dividends on a regular basis can be difficult to resist. I have a healthy dose of dividend-paying stocks in my portfolio and love the inflation protection that comes from a rising income stream.

Reuters: – U.S. bond funds sue Puerto Rico, worried about bankruptcy threat.– U.S. mutual funds holding about $1.7 billion in Puerto Rico debt have sued the cash-strapped commonwealth, accusing the Caribbean island of passing an act modeled after the U.S. bankruptcy code in what could be a potential threat to American investors.

Bond Market

FT: – Fed has grown complacent on credit market risk.– “High-yield bonds have certainly caught our attention,” Janet Yellen, Federal Reserve’s chairwoman, remarked after the US central bank’s June policy meeting. “There is some evidence of ‘reach for yield’ behaviour.” Yet, the Fed’s broader message to investors was clear: we are not concerned and we will keep interest rates low; keep on dancing. I believe this is a policy error. The Fed is underestimating a build-up of risk in credit markets which is threatening financial stability.

Think Advisor: – Bond market sweet spot.– In one of 2014’s most confounding developments for Wall Street’s army of analysts, bonds are outperforming stocks and long-term U.S. Treasuries are leading the way. At the start of the year, few observers expected this trend.

Reuters: – Finding a soft landing when bond prices fall.– Contemplating the end of a 30-year bull run in bond prices is a bit like waiting to go to the dentist for some long-needed procedure. You know it needs to happen, but you procrastinate.

Treasury Bonds

Business Recorder: – Long yields hit three-week lows.– US Treasuries yields dropped on Thursday as traders eyeing a possible slowing of American economic growth drove up prices for a fourth straight day. Yields of 10- and 30-year Treasuries touched three-week lows as investors, already surprised on Wednesday by data showing the US economy contracted more than previously thought in the first quarter, reacted to data showing short-of-forecast increases in US consumer spending.

WSJ: – Spreading unease in corporate bond markets.– Drivers know the cautionary phrase “objects in the mirror are closer than they appear.” Buyers of corporate bonds should bear it in mind when looking at spreads, or the extra yield company debt pays over government debt. They may not be as generous as they look.

High Yield Bonds

Futures: – Are junk bonds the new (old) bubble?– The zero interest rate environment has created complacency and a reckless desire by investors of chasing yield into the riskiest spectrum of the financial markets. The chart below is the history of junk bond yields dating back to their beginning as an asset class, illustrates this.

MarketWatch: – More secured bonds in U.S. high yield default mix.– Secured bonds have been more visible in the high yield default mix in recent years, comprising 49% of defaults by par value and 41% by issue count since 2010 compared with just 13% and 12%, respectively, over 2000-2009, according to Fitch Ratings.

Emerging Markets

Wisdom Tree: – The emerging markets 50/50: Yields & volatility.– The emerging markets (EM) represent great valuation opportunities and some of the highest income levels, but they also represent significant volatility. One strategy that may help investors capture yields and mitigate volatility is to blend EM equities and EM corporate bonds.

WSJ: – Six alternatives to high-yield bonds.– We recently ran a search for stocks that should appeal to junk-bond refugees. The six names below have current yields of more than 2% and, more important, potential for peppy growth in earnings and dividends in coming years.

The Tennessean: – Arithmetic, common sense required for sensible investing.– Sound investing begins with a careful assessment of risks and benefits. That requires a willingness to do basic arithmetic. Sadly, an enormous number of people just lose it when confronted with arithmetic. Worse, many hate paying taxes even more than they hate basic arithmetic. Many of those people are the proud owners of municipal bonds or municipal bond funds — even though that ownership won’t benefit them in any way.